A case sounds a warning about pension safety

October 1, 2000, Sunday, Late Edition - Final

SECTION: Section 3; Page 4; Column 1; Money and Business/Financial Desk

LENGTH: 1321 words

HEADLINE: BUSINESS;
A Case Sounds a Warning About Pension Safety

BYLINE: By DAVID CAY JOHNSTON with KENNETH N. GILPIN

WORKERS who think that their pensions are secure because the government guarantees them, and that their 401(k) money is safe once it goes to an investment house, may want to follow closely a case in Portland, Ore., that has cost 100,000 people some major chunks of their retirement income.

Late last month, the United States Labor Department, the Securities and Exchange Commission and Portland members of the Oregon Laborers Union, part of the A.F.L.-C.I.O., all filed civil suits against the trustees of the union's retirement funds, seeking to recover $225 million in losses.

The government says in its filings that the losses resulted from what it calls a "Ponzi-like scheme," where fresh investments were used to disguise earlier shortfalls. Government officials say they are continuing to investigate the losses in accounts that until recently were thought to be worth about $1 billion.

Pension experts say the case illustrates the vulnerability of retirement funds. But a bill up for a vote in Congress as early as tomorrow would curtail the mailing of reports and make it harder to discover schemes, some union members say. "We counted heavily on those disclosures," said Larry Miller, one of the two workers in whose name 15,000 union members have brought their suit.

Sponsors of the bill say it would allow Americans to save far more with the tax advantages of Individual Retirement Accounts and 401(k) accounts. One of the sponsors, Senator William V. Roth Jr., a Delaware Republican, said that most workers throw out retirement fund reports and called them "a wasted administrative effort that can be very costly to companies." But in light of the Portland case, Mr. Roth said he would seek to change his bill to accommodate workers' concerns.

The losses in the Oregon retirement funds are likely to have an especially great impact on the Portland union members and retirees, though nobody can yet say just how large. Manual laborers, who do the heavy lifting at construction sites and the like, typically retire early. They are therefore all the more dependent on their 401(k)'s.

The government's Pension Benefit Guaranty Corporation insures traditional pensions, but not 401(k)'s, which constituted about half the missing $225 million.

"No one knows yet how much we will lose," said Mr. Miller, 53, who had hoped to retire in two years, after three decades of manual labor. "Our families are dependent on this money and this case is causing a lot of havoc, a lot of heartache," he said. "Our retirees are in near-panic situation, but we had to get this out in the open."

Karen Ferguson, director of the Pension Rights Center, a nonprofit group in Washington, said losses in the retirement accounts are likely to be significant. "Because of the way federal pension guarantees work, and because laborers tend to retire early because they cannot work until they are 65, the workers stand to lose a lot," she said.

Mr. Miller said workers began to suspect something was amiss two years ago. The plans' summary annual reports, one-page documents that by law must be sent to every worker and retiree each year, contained a $1.8 million discrepancy, he said.

Union members persuaded Labor Department investigators to ask some questions. The investigators focused on a Portland money management firm, Capital Consultants, and its founder, Jeffrey Grayson, 58, both having a long history of conduct that has drawn the attention of regulators.

In 1976, the S.E.C. briefly suspended Mr. Grayson and two subordinates for investing $280,000 of retirement funds in a mortgage certificate that turned out to be worthless. Since 1992, Capital Consultants has charged some pension funds 3 percent in annual fees, Labor Department records show. A 1 percent fee is not unusual, and some large pension funds incur costs of just one-twentieth of 1 percent.

Mr. Grayson still enjoyed the confidence of trustees of various pension plans, some of whom, according to records of past administrative cases, also received valuable gifts from Mr. Grayson and his associates, including hunting trips and visits to Disney theme parks. The Portland case, however, has raised no such allegations.

In this instance, Mr. Grayson gave a multiyear contract to a consulting company owned by John D. Abbott -- the business agent for all Laborers Union locals in Oregon, southern Idaho and Wyoming -- and his wife, Pamela. The Oregonian, in Portland, said the contract was worth $805,000, and a potential total of nearly $2 million if renewed.

Mr. Abbott, who has also been a retirement fund trustee, could not be reached, and Capital Consultants refused to comment. But in an earlier statement, Capital Consultants said the contract with Mr. Abbott's company "was approved by legal counsel and is in compliance with applicable laws and regulations." Confirming that Mr. Abbott's role was to win business for Capital Consultants, the firm said, "It is common in the industry for investment advisory firms, such as Capital, to retain individuals, including former pension trustees or union officials such as Mr. Abbott, for this purpose."

MR. GRAYSON, meanwhile, made curious and sometimes disastrous investments with the retirement funds. Among these was a $6 million investment with Title Loans of America, a Georgia company that lends to individuals with low credit ratings at extremely high interest rates. The loans are secured by the titles to the borrowers' cars.

Title Loans of America is owned by two trusts whose sole beneficiary is Alvin I. Malnik, a Miami lawyer whom the New Jersey Casino Control Commission found in 1980 and 1992 to be "a person of unsuitable character" to have any role in the industry. In 1980, the commission found Mr. Malnik to be so intimately associated with organized crime figures that it denied licenses to two businessmen who had done deals with him.

Mr. Malnik has in the past denied that he is involved with organized crime. Neither he nor the chief executive of his company, Robert Reich, responded to requests for an interview. The trustees, through their lawyer, Robert B. Miller of Portland, all declined comment, but on Friday they filed their own suit against Capital Consultants, Mr. Grayson and others, seeking recovery of lost funds.

It was another, larger investment, however, that according to the S.E.C. set off what it called the Ponzi scheme in late 1998. Capital Consultants invested $160 million, through a company called Wilshire Credit, in a portfolio of loans that carried high interest rates because, here, too, borrowers had poor credit histories.

The Labor Department and the S.E.C. say that in late 1998, several months after the deal closed, Capital Consultants realized that the loan portfolio was worth only about $6 million, having lost at least 96 percent of its value. Rather than tell their clients the money was lost, the S.E.C.'s lawsuit said, Capital Consulting, Mr. Grayson and his son, Barclay, "continued to report to their clients that the loan had a value of $160 million." The suit said the Graysons and their firm "continued to sell clients participation interests in the loans at full value." They poured another $71 million of retirement funds into a scheme to create the appearance that interest payments were being made on the loan portfolio, the S.E.C. suit said. Mr. Grayson, through his lawyer, Norm Sepenuk, declined comment. Barclay Grayson's lawyer did not return a call seeking comment.

About 100,000 workers, retirees and dependents will be affected, said Dan Feinberg, a pension lawyer in Oakland, Calif., who filed the union members' suit against the trustees. About half the missing money in Portland was in 401(k) plans, he said. The only chance workers and retirees have of recovering more than a small fraction of their lost 401(k) savings is from the trustees' liability insurance, Mr. Feinberg said.